dollar (formerly known as two cents)

Please don’t expect this to be a well formed idea, I just want to throw something to discuss. I was reading the discussion in the previous post topic and there is a point that the grave situation in US credit markets may prompt US authorities to cooperate (can’t happen without cooperation not only between Treasury and Feds, but also some invisible forces) to debase the dollar into high-inflation mode that will lighten up the debt burden. In other words just inflate out of all problems. Let forget for a moment the detail that this may fail just because the cost of debt servicing will jump much faster then the debt will be inflated, i.e. the borrower will blow-up before enjoying all the benefits of high inflation and the creditor will blow-up after enjoying all the benefits of high inflation.

I’m about something else. The bulk of S&P500 corporations are making 20%-30% of profits abroad. Quite many of them are making over 50% of money abroad. There is also many foreign corporations that do the bulk of business outside of their home country. And there is also a good tradition to use dollar and dollar-denominated assets in international trades not directly related to the dollar home country. The mercenaries around the world are also readily accepting dollars and the dollar is the best currency to trade weapons as well. Heck, even the terrorists love dollars.

What I’m trying to say is that modern capital is international by its nature and the dollar is its blood. So what could be its opinion about any plans to debase the currency?

Those who are in need of inflating out of the problem are failed homeowners, credit card debtors, leveraged speculators, exhausted consumers and some of their elected congressmen. From the point of view of the world capital they are losers, and it has little interest in losers. If the chunk of American consumers are falling off the train the capital will write them off, not bail them out. If American government will try to inflate the dollar they won’t be able to do that. If the congress will try to change the rules and force the Feds to print dollars they strangely won’t collect enough votes.

I think any dramatic change in policy can’t happen in interest of losers if the most powerful of the world do not cooperate. And losers won’t be able to win any policy war against the big capital because… because they are losers

You suggest that Fed/Treasury may attempt to further debase the dollar via expansionary policy in hopes of reflating debt and asset prices.

However, given the dominance of the dollar through out the World and specifically its value to international trade that certain “invisible forces” of the markets and politics would prevent significant dollar debasement from occurring. These “invisible forces” are simply self-serving with no concern for the “Losers” and seek to maintain a currency level and treasury prices that best serves their own interests which is incongruent with Treasury’s bailout plan. In other words, there are significant gains to be had at the expense of the “Losers” and when the majority of the world is holding dollars the need to maintain the dollar’s purchasing power is key to seizing the opportunity at hand.

Is this a fair interpretation?

I am sure these SWF will have significant influence on the purchase of RE and other assets that are soon to be on sale as this crisis deepens.

And my opinion is that hyperinflation is impossible unless Feds will monetize some of the outstanding debt at increased rate. From its side, the treasury has to run some bail-out programs using taxpayer money.

So far none of this happened yet. And my opinion is that it won’t happen, at least not at large scale.

Feds are mediating banks to bail-out Ambac for weeks and weeks but they did not put a single dollar of their own so far.

Look at Northern Rock and BCB – that’s a setup for inflation in England. Feds were watching a near collapse of Countrywide and did nothing except arranging a bogus takeover. And I support them in that.

Hi Roxy
Don’t believe in hyperinflation, but I do believe in latin style inflation of 10% to 20% per year. If you believe the DXY, we have been there for a while.

The big barrier to deflation is the amount of debt held in foreign hands.

It is actually very easy to get to hyperinflation, all you have to commit to is shortening the government debt maturities to zero. We have played with that from time to time.

Look carefully at past hyperinflations and they come gently, overnight. What characterizes them are the following:

1. Large foreign obligations
2. Increasing negative trade balance.
3. Large portion of working population in government
4. Indexed government wages, pensions, and social service.

My view is that hyperinflation is not possible in the US unless the government takes over local government debt obligations since they are on the whole indexed through pension and wage commitments.

Any sort of treasury involvement in MBIA and AMBAC should send you running. Backing local government debt with the treasury is the gate to hyperinflation.

I have never feared the fed or treasury’s monetization of homeowner debt, as long as it does not lead to new originations. The negative balance of trade in and of itself does not point to hyperinflation.

Roxy: After struggling with the Inflation/Stagflation/Deflation question I have come around to your deflationary conclusion.

Just as my alias suggests I know just enough to be dangerous so let me attempt to offer my rationale as for deflation.

M1 continues to contract along with net-free reserves (radically) and as you point out the Fed has yet to monetize Treasury debt at increased rates. As I understand it the present environment appears to be similiar to the 60’s and 70’s with the exception that today’s Fed while persuing an expansionary policy is draining the liquidity behind the scenes to reign in any inflationary tendencies and keep the banks and credit in check. Given the state of banks and credit markets this draining action is contractionary so long as the banks continue to have liquidity issues. Deflation will be a natural outcome of the contraction (i.e. there will be far fewer dollars chasing too few goods). My only question is how long can this game be kept up?

The dollar will find stability as the balance account deficit wanes via increased capital inflows as suggested by Roxy. I believe the present inflationary concerns created by the flight to commodities is extreme and presently over extended and should correct this week or next which will futher deflate equities and the indices to their next swing low. Additionally, the short-term supply/demand imbalance in commodities should moderate with the contraction providing a brief opportunity to develop sustainable fuel and agricultural alternatives and solutions. I just hope there is leadership that will recognize this opportunity and act on it. Otherwise, our days are numbered.

“I don’t measure inflation or deflation by the misery of the populace. You can have wage deflation (take any African country) and currency inflation (take any African country) at the same time.”

I believe PrintFaster will be proven correct on this statement. I don’t believe we will see any significant wage growth, but I do think we will see imported commodity and goods to rise. But I don’t expect import prices increases to be straight as an arrow.

I don’t see how the dollar will strengthen, since I can’t imagine foriegners to continue to loan the US $2+ billion a day. It will take a considerable change by the american public to change from a nation of consumers, into a nations of producers competing in the global economy. Consider that 80 years ago, the average American worked 12 hour shifts Mon through friday and 6 hours on Saturday. The Chinese and Indians working in manufacturing jobs work about the same hours as American workers did 80 years ago. Does anyone believe that American workers would be willing to accept these working hours for much lower wages?

Sooner or later Foriegners are going to either figure something else to do with their money, or they will need capital to deal with the credit crunch in there own countries. That daily 2+ billion credit line will disappear. With no foriegn financial aid, the dollar will plunge.

I think we begin to see further erosion in US manufacturing (ISM Manufacturing report dropped to 48 this weeK). Some US manufacturers will go belly up, others will relocate overseas where labor is still far cheaper. For US workers to complete with Asian overseas workers, the US dollar would probably have to fall by 90%. I recall reading a statistic last year, that the cost one one American worker will employ about dozen chinese workers). Even if you make products competitive, we still need a market to sell them.

As I recall USA is still the biggest industrial producer in the world, China is second, with the difference within statistical error. And only small part of our population is employed in industrial production. We just do a lot of expensive toys. Planes, rockets, drugs.

1. Large foreign obligations
2. Increasing negative trade balance.
3. Large portion of working population in government
4. Indexed government wages, pensions, and social service.

I see very little difference between Latin style inflation and Hyperinflation, only 2-3 years.

Good point on the Japanese and German auto makers from post of a couple of days ago.

The main difference is that they don’t have poorly trained, uneducated Americans working for them being managed by greedy incompetent American managers. The larger part of the fault falls on the managers, as the Japanese and German auto plants here can actually produce a car that doesn’t need too many repairs before it is delivered to the customer.